SERIES: “Fix The Economy” – Make Rip-Off Loans Illegal

Welcome to the latest series at the wildly popular “5 Things That Will Help Fix The Economy” In this series, I will be sharing some principles I believe will help fix the economy long term.

The economy has been stuck for some time. The words “Great Recession,” “Fiscal Cliff,” “Sequestration,” “Stagnant,” and “Jobless Recovery” have become common everyday language.

Number 5:  Make rip-off loans illegal

I know this seems a little out of place when compared to the other four items, but I really feel this needs to be included. When economies allow organizations to charge OUTRAGEOUS fees and interest to citizens, it is positioned to eliminate the middle class.

In a coaching appointment, I had a person who had signed up for a “payday” loan. The loan agreement clearly outlines that the “annual percentage rate” was 782.14%. That is not a typo! The interest being charged to this person was 782.14%.

I’ve heard arguments from those who make these types of loans:

  • We help people who are “in a pinch”  You can actually say that with a straight face?
  • People voluntarily sign up for these loans.  This doesn’t make it right!
  • These are smaller loans, so it’s not that big of a deal.  Yes, it is!

Have you noticed where these rip-off loan businesses are located? Near rich neighborhoods? Nope. They are located next to communities where people have little money education. It’s my goal to help educate everyone to the point that no one would ever borrow money with such horrific financial terms and these types of organizations have to go out of business!

This type of lending is awful, and it should be illegal. Who’s with me?

Read the entire series (available after 3/14/2013)

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  1. Trish Crossley on March 11, 2013 at 8:09 am

    I am with you!!! These pay day loan companies are detrimental to people and won’t allow them to get ahead and out of the paycheck to paycheck cycle!

  2. Mark on March 11, 2013 at 9:07 am

    I’ll never forget that person, that company, or that employee on the other end of the phone. The whole scenario gave me a very special disgust for rip off loans.

  3. Nathan Rice on March 11, 2013 at 12:32 pm

    Yes, they’re a ripoff. But making them illegal (or other things like making it illegal to buy generators and sell them for 2x what they’re worth in an area hit by natural disaster) is a move that fails to recognize the economics of the situation, and at a more fundamental level, the principle of voluntary exchange.

    At the principle level, making “price gouging” illegal is, by its nature, reducing human freedom. A business’s freedom to maximize profit, and a customer’s freedom to choose for himself whether or not the arrangement is a bad deal.

    At the economic level, let’s recognize the reality: the people who get payday loans can’t qualify for any other type of loan. It’s either get a payday loan or bills go unpaid. This could mean having your power cut off, not paying the rent, or something else that you really do need to survive.

    These are small, short term loans, so annualizing the interest rate for effect isn’t helpful, either. We all know that people with bad credit have to pay more in interest. People who have consistently abused credit, so much so that no one else will provide them with a loan, SHOULD pay outrageous interest rates if they want a loan.

    That interest rate is set by the market. If more people actually paid back their loans, the interest rate wouldn’t be so high. The costs of operating a payday loan store are unusually high.

    I could also touch on personal responsibility … that the government has no business saving people from their own poor decision making … but that’s another post.

  4. Mark on March 11, 2013 at 2:27 pm

    When we’re in desperate situations we make irrational decisions. The person that was in that situation wasn’t there because of stupidity. They were there because of uncontrollable circumstances and unfortunately didn’t know what else to do. Sometimes we don’t fully understand until we’ve actually been there.

  5. Nathan Rice on March 11, 2013 at 2:35 pm

    Mark, we also make irrational decisions at the supermarket checkout line. $1.50 for a 20 oz soda!? When a 2 liter is only $1!?

    Per oz, that’s over 100% markup. So clearly, it should be illegal, right?

    I say again, society isn’t responsible for protecting people from bad decisions. By all means, educate people, help them if you can through charity, but don’t presume to know that you know better how to spend someone else’s money than they do. You might save him from a mistake, but you rob him of his human dignity by taking away his choices.

    There is no one better equipped to make decisions about how to spend a man’s money than the man who earned it.

  6. Honest Opinion on December 27, 2013 at 1:53 pm

    With the world economic situation of the world revolving round the proverbial toilet basin, I have a better idea. Deal out a bit off justice, apply for a loan, cancel your card, and call their bluff on a promised day in court. Credit is a curse, I’m not bothered about my credit rating, couldn’t give a monkeys, I’ve been on the recieving end of this pack of thieves, they deserve to be turned over and put out of business. I’ve not much love for the banks, but these brass necked extortionists are really pushing it!

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